If Greece Starts Dominoes Falling, What's Next?

This is TALK OF THE NATION. I'm Neal Conan in Washington. New elections are now set for June 17 after a failure to form a government in Athens earlier this week, but some worry that Greece might be out of the eurozone before votes can be cast. While the great majority of Greeks say they want to keep the euro, opinions polls also show anti-austerity sentiment rising.

And while German Chancellor Angela Merkel showed some flexibility yesterday on stimulus and said she wants Greece to stay in the euro, she also continues to insist that Greece must abide by its commitments for further austerity.

In the meantime, more and more funds are being withdrawn from Greek banks by depositors who fear that accounts now denominated in euros will suddenly be transformed into new drachmas. If Greece does leave, there could be a domino effect in Portugal, Ireland, Spain and Italy. Some even argue we're seeing the beginning of the end of the euro itself.

If you do business in Greece, if you have money there, what's your concern? Give us a call, 800-989-8255. Email us, talk@npr.org. You can also join the conversation on our website. That's at npr.org. Click on TALK OF THE NATION. Later in the program, Farhad Manjoo on how Facebook will change after it goes public tomorrow.

But first the consequences of a Grexit. Sylvia Paggioli is NPR senior European correspondent. She joins us now from Rome, and Sylvia, always good to have you on the program.

SYLVIA PAGGIOLI, BYLINE: Thank you, Neal, it's good to be here.

CONAN: And this drama has been playing out for more than a couple of years now. Are people really getting nervous?

PAGGIOLI: Well, you know, there was a great deal of concern after the Greek President Karolos Papoulias, after he failed to convince the parties to form a coalition government, when he said we might have a catastrophe in the banking sector. There were rumors over the weekend that there would be a bank run. It didn't happen. There was no ATM crisis.

Yes, large sums are being withdrawn from Greek banks, but that's been happening ever since this whole crisis started in 2009, and most of that money has been withdrawn by wealthy families and businesses, and actually it had started to flow back to Greece before the May 6 vote.

But, you know, the pressure from the EU and from Germany is very strong. At this last election on May 6, the big winner or at least the big surprise was this leftist coalition that came out of nowhere and scored second. And it's doing very well in the polls. Its popularity is growing. It is the party that called for the out-and-out cancellation of the loan agreements, the terms of the loan agreements.

But it's beginning to change its terms. This party is called Syriza. It's no longer calling for, you know, complete drop of the agreements but about renegotiating. And this change, obviously, is coming about because the party is well aware that, you know, its surge in votes came not just from far leftists but from centrists and people left-of-center.

You know, but this is today. Things could change. As - you know, there's 20 days at least until the next election. You know, if something happens like a banking crisis, that could cause panic. But for the moment, the mood in Greece is relatively calm and stable and remains strongly anti-austerity.

CONAN: Well, Greece was not the only country that voted that day. It was the same day that President Nicolas Sarkozy was voted out of office and Francois Hollande voted in. There have also been state elections in Germany in between then and now in North Rhine-Westphalia, the most populous state in Germany, where Chancellor Angela Merkel's party suffered a stinging defeat not just for this reason, but that was one reason. Is there a sense that there's been a corner turned?

PAGGIOLI: Well, I think certainly Greeks certainly feel they're not alone anymore because of all these things. There was also a local election in Italy, where a maverick anti-austerity party made very big gains. Definitely I think the people - people are feeling very much like a corner may be turning.

For example, until a few months ago, until a few days ago, the mantra here in Italy was oh, let's not end up like Greece. Greece was the black sheep, the pariah of Europe. I've been hearing people since the May 6 elections say wow, look at those Greek voters. Look at them. They finally have taken their destiny into their own hands.

There's a great sense of, you know, something that these people have made themselves heard. There's this sense, there's this really discrepancy, this huge discrepancy, between voters and their political class. Everywhere there have been elections in Europe in the last year or so, voters have spoken clearly in protest against austerity measures imposed by their governments. And several of these governments have fallen.

And in this crisis of legitimacy of mainstream parties, the most worrisome development is the growth of populist and radical parties, and as social tensions increase, there's also the danger of politically inspired violence. Here in Italy, for example, authorities today stepped up security. They're fearing a resurgence of domestic terrorism like that of the red brigades in the 1970s and '80s.

Just last week, a group calling itself the Informal Anarchist Federation claimed responsibility for shooting the manager of a nuclear energy company in his legs. And the group also threatened Prime Minister Mario Monti and the tax collection agency that many Italians criticize as being too heavy-handed.

Now in this climate, it's clear that a plan B to solve the eurozone crisis is long overdue.

CONAN: At the same time, you talked about some gains on the left and some concerns about that. There were disturbing gains by the National Front in France, which came in third in the elections there, and a group in Greece, Golden Dawn I think it's called, which marches torchlight parades and Nazi salutes.

Absolutely. I've talked to some of them, and they are really scary people. And it was very much - it was the most worrisome aspect of the Greek elections. They went from something like a totally negligible .29 in the last elections to seven percent. But the latest polls in Greece are showing a drop in popularity in Golden Dawn, and Greek analysts are saying that the vote for Golden Dawn was the real protest vote, while the vote for Syriza, the radical left coalition, is seen by a growing number of Greeks as the only viable alternative.

Yet enough of a swing so that they could form a government?

PAGGIOLI: That'll be - we'll have to see. That - everything's in the numbers. The last - at the last election, it was just all over the place, and we couldn't tell. The next - obviously the new democracy, the conservative new democracy party, which was together with the socialists the ones who were supporting the technocratic government that had been in place for the last several months, is the - came in first, but it had only a poor showing.

They are hoping - they are trying to present themselves now as the real alternative to save Greece, to save Greece from leaving the euro and trying to form some kind of coalition with other fringe, small, centrist or center-right parties that are - were all in favor of the terms of the bailout.

The voters voted overwhelmingly against austerity. We'll have to see what the climate of fear, of sense of self-confidence that Greeks will have in three weeks from now, 20 days from now, when they vote again to see exactly which way it could go. But again, it could be a problem of numbers and of forming the government again.

CONAN: Heather Connelly served as deputy assistant secretary of state in the Bureau for European and Eurasian Affairs from 2001 to 2005. She now directs the Euro Program at the Center for Strategic and International Studies. She's been kind enough to join us here in Studio 3A. Thanks very much for coming in.

HEATHER CONNELLY: Thank you for having me.

CONAN: And we keep hearing the Greeks overwhelmingly in favor of keeping the euro, and now we find also they are overwhelmingly opposed to further austerity. Are these two things mutually exclusive?

CONNELLY: Well, they'd like to put them together, you're absolutely right. The Greek people, over 70 percent say we want to remain in the euro. And two-thirds of them say we absolutely cannot stand these austerity measures.

CONAN: And understandable. Their unemployment is at ferocious levels.

CONNELLY: Twenty-three percent unemployment. Youth unemployment is gaining. This is starting to become really a danger moment for this economy, for this society. But there is these mixed messages, and this is coming out in the election results.

What we saw on May 6, Sylvia was absolutely right, we saw six parties come into the parliament, far left, far right. The establishment parties, the center-left, PASOK, center-right, New Democracy Party, they didn't do well. There's a growing sense - the populism in Europe today is right now - it used to be anti-immigrant. It still holds that. It's anti-Europe. It's anti-establishment. They want relief from this austerity.

But right now we are at this classic game of chicken with Brussels, Berlin, the European Central Bank in Frankfurt saying Greece, you have to take these steps. We know it's painful, we'll try to give you some relief, but you have to take these steps and Greek leaders and the radical left coalition saying I think we can renegotiate this, better terms, and stay within Europe and eurozone. We're not sure you can have this - these both. And that's what has to be fought over for the next 20 days: Can you do both, or is Europe going to demand austerity?

CONAN: And if Greece can renegotiate, then what's to prevent Spain from renegotiating and Portugal and Ireland and down the road Italy?

CONNELLY: Well, Europe is going to be very loathe to renegotiate this. Remember this has been a two-year-plus event. We started with the first Greek bailout package May of 2010. We just finished the second bailout package in March of this year. Now we're going to renegotiate this package. Markets are just not believing that this has - you know, going to be through.

CONAN: The markets seem to have concluded Greece is out.

CONNELLY: They're starting to come to that conclusion, that this is not going to end well. And the concern is it's going to end in a very disorderly way, not in a very - an organized way so at least we can prepare for this. We don't know legally how Greece can even exit the euro. Some are suggesting it has to exit the European Union. Some are saying oh, this is a technical matter, it won't cause that big of a catastrophe. Others are saying it'll be cataclysmic, that Europe will really disintegrate. We don't know. We've never had this happen within a currency union.

CONAN: If that flight of capital spreads from Athens to Lisbon and Madrid, at that point the cost of borrowing starts increasingly becoming unsustainable, and they may not be able to stay in the euro, either.

CONNELLY: Right, it's really the unintended consequences of this. They're going to start rolling out of control. Sylvia was correct, we've certainly seen a slight uptick in withdrawals from Greek banks. Today, Madrid announced their third-largest bank, Bankia, which is going to go - which is going to be nationalized, just withdrew a billion euros. So it's starting that unease. That slow panic is starting to set in. We'll have to monitor this very closely.

CONAN: We're talking about some of the ways Greek debt drama may play out. Economist Zachary Karabell says yes, be concerned about Greek dominos falling but not panicked yet. He joins us next. If you'd like to do business in Greece, if you have money there, what's your concern? If you have questions about what could happen in Europe with the euro and with the political union, give us a call, 800-989-8255. Email us, talk@npr.org. Stay with us. I'm Neal Conan. It's the TALK OF THE NATION from NPR News.

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CONAN: This is TALK OF THE NATION from NPR News. I'm Neal Conan. In Athens today, a brief respite for Greeks. The Olympic torch passed to the organizers of the 2012 London games. Dozens of schoolchildren came out in the rain, they cheered and sang the Greek national anthem outside the ancient Olympic Stadium.

Celebrations, though, masked the ongoing financial and political crisis. Many fear Greece grows more and more likely to default and exit the eurozone. If so, many agree, that could cause a chain reaction from Spain to Portugal to Italy to other countries. We're talking today about the possible outcomes and consequences in Greece.

If you do business in Greece or have money there, what's your concern? 800-989-8255. Email us, talk@npr.org. You can join the conversation as well at our website. Go to npr.org. Click on TALK OF THE NATION. Sylvia Poggioli, NPR senior European correspondent, is with us from Rome. Here in Studio 3A is Heather Conley, director of the Europe Program at the Center for Strategic and International Studies.

And joining us now, Zachary Karabell, an economist and president of River Twice Research, also a contributing editor to the Daily Beast. He joins us from our bureau in New York. Nice to have you with us today.

ZACHARY KARABELL: Thanks, Neal.

CONAN: And as you pointed out in a recent piece on the Daily Beast, we've seen other countries come up against these kinds of crises before, and it hasn't - it's not been good for them, but it's not been a disaster for the world.

KARABELL: We've seen it a lot. In fact, if you can remember back to the 1970s, it seemed like one Latin American country after another was defaulting on something; other crises in the late '90s; you know, the Mexican bailout of the peso crisis, which was so famously or perhaps infamously solved by Robert Ruben and Larry Summers, and then of course a variety of Asian currency and debt crises.

So it's not like in this particular moment that Greece has invented the notion of crisis. They may have invented Western civilization, but not financial crises.

CONAN: In the meantime, if this is inevitable, though, that follow-on effect, that could be pretty serious.

KARABELL: Yeah, I mean I think we do have to put this in the context of an extremely fragile global financial market psychology, for lack of a better word, that has really not dissipated since the fall of 2008. And it's one of the reasons why what would otherwise appear to be manageable issues - Greece is a $300 billion economy, certainly not tiny but about the size of the state of Maryland - there are 11 million people in Greece - I think these facts are well-known, but they bear repeating.

And yes, the concern is that Greece as a domino or as a metaphor for the viability, or lack thereof, of the European system, is what sends global markets into such a tizzy. But like any other thing, it requires a certain psychology for those dominos to be seen as falling. You know, we can always spin Armageddon scenarios at almost any period of time of if, if, if and if, then things completely fall apart.

And I think right now markets and to some degree the political class is gripped in a world where those fears seem much more viable and much more real and much more probable than any actual solutions.

CONAN: Sylvia Poggioli, there in Rome, are the political elites taking council of their fears?

PAGGIOLI: Well, you know, you have, as I said before, there's Prime Minister Mario Monti, who, since he came into power after - when the Berlusconi government had - basically was pushed out, he took over, and he also had to introduce a very stiff austerity. But he has always been in favor of balancing that with more growth, and he has many times taken to task also German Chancellor Angela Merkel for not accepting - being so rigid in her austerity first policies.

Definitely both the Hollande victory in France and the other elections we've been talking about have given much hope to politicians like Mario Monti that something could be changed. I think this is certainly going to be one of the major topics at the G8 in the U.S. starting this weekend, where Greece will be again center-stage, and I think there's going to be an awful lot of pressure on Germany to start to promote more stimulus.

Already Mario Draghi, the head, the director of the European Central Bank, has been also pushing more for growth, and as you said, Neal, I think Chancellor Merkel is beginning to soften. Perhaps she's beginning to start to blink first.

CONAN: Heather Connelly, if Chancellor Merkel wants to blink twice, she's going to have to go before the Bundestag, the German parliament, and ask for money to essentially bail out Greece, an unpopular move.

HEATHER CONLEY: You're absolutely right. She's already begun to blink. When Angela Merkel and Francois Hollande met yesterday, although the body language was stiff and certainly made clear that Greece needed to continue its austerity measures, she's already signaling, yes, of course we will look at growth. The question is how they're going to do that, whether they're going to negotiate a new growth pact.

And again, the devil here is in the details. And as much as Hollande's victory certainly strengthens Mario Monti's call, clarion call for growth, where is this growth coming from? They've mentioned new funds for the European Investment Bank, rejiggering existing structural and cohesion funds from the EU.

But what Angela Merkel does not want to do is open this fiscal compact, which had all the austerity. She wants to take that to the Bundestag at the end of this month with an additional vote on the European stabilization mechanism, which is what Germany will contribute, the bigger firewall, the bigger bailout.

She had a devastating loss last weekend in North Rhine-Westphalia. She's had - she's losing her own party in some respects, and she's needing to reach across her aisle with the Social Democrats, who have already listed their demands. And remember, elections next year in Germany, 2013. This is all about getting through that next election cycle and how much the German taxpayer is going to have to pay.

KARABELL: Although Heather, on this one, I think, good note of what's going on in German politics is that the German government is opposed by Social Democrats and Greens, who are more in favor of...

CONAN: More European investment(ph), the conservatives...

KARABELL: Right. So unlike the French or the Greeks, where the opposition party is fighting against austerity, the government in Germany has some interest in actually becoming less austere because it removes some of the attack from their opponents. And I think that could work as a favorable dynamic.

CONLEY: But here's the paradox. Angela Merkel is very popular right now in Germany, well over 70 percent. Her policies are very popular, this austere message. I agree with you that her opposition wants more growth, but she has to be very careful of her own coalition, which continues to get shakier. These dynamics are fascinating to watch.

CONAN: Let's get a caller in on the conversation. Tom with us from Traverse City in Michigan.

TOM: Hello, yeah. Thanks, Neal. My question is more along the lines of are these domino effects going to come into play where we might see maybe a split in the European Union and the eurozone, say like a developed, in a developing eurozone?

CONAN: Roughly north and south, Sylvia Poggioli, because you have of course a financial common currency but no fiscal union. There's no responsibility for Germans to pay Greek debts, for example.

PAGGIOLI: You mean an A section and a B section, a dual track.

CONAN: Exactly, yeah.

PAGGIOLI: This has certainly been something that was talked about in the past, that there was a possibility of a - the two-speed Europe has been an expression used many times, and, I mean, it goes years back. And I think, again, you know, when we come back to what the impact of what if there were to be somehow a Greek exit from the eurozone, everybody is in front of the big black hole.

There's absolutely - there's no - there's no course here. Nobody knows. There's no, you know - nobody knows what could happen. And we hear the most dire predictions and some of the, you know, sort of mildest ones. The issue really is, if this thing gets over fairly calmly at some point, they're going to have to start really thinking about if the euro does survive, if - how it - the rules of the game have to change because, as you said, there's no political union, there's no fiscal union, and the way it was set up in the beginning in 2000, it just - it shows how it didn't work.

It's too weak. It can't work as it is now. I think that's the first thing we've learned. In terms of what could happen, the impact, the domino effects, absolutely nobody knows.

CONAN: Tom, thanks very much for the call. Let's see if we can go next to - this is Richard, Richard with us from Columbus, Ohio.

RICHARD: Thanks, thanks for taking the call.

CONAN: Go ahead.

RICHARD: I wanted to talk a little bit about changing the definition of what's going on. We keep talking about austerity, it's terrible, apparently (unintelligible) in Greece. (Unintelligible). And I'm an investor in Europe, and I have money there. So I have some concern. But when I look at what people are talking about, austerity, it's really living within your means. Let's change the definition of what's going on here.

We're saying to people you need to live within your means, and they're going, no, we don't want to. (Unintelligible) go forward...

CONAN: Well, your phone is betraying you, Richard, but I think we get your point. And it is, Heather Conley, Greeks were, let's not sugarcoat it, profligate in the past. They borrowed well over their ability to repay. Yet you look now at economy - we talked about unemployment levels well over 20 percent and much more than that for young people, pensions being cut back, retirement age being increased, all kinds of terrible economic effects. There is only so much pain people are wiling to take, and they demonstrated that in the elections a couple of weeks ago.

CONLEY: Absolutely. And this is - Greece is truly an exception - nearly 160 percent debt-to-GDP ratio. Prior to the crisis, Greece only collected 6 percent of taxes. It had an extremely large public sector, so much cronyism, so many informal systems that were really its economy. And over the last 10 years, not only did it go on a credit spree, it really fell behind. It lacks competitiveness. It does not really have an export other than its wonderful tourism.

And so we're really talking about a generational transformation of the Greek economy and really how the Greek society operates within that structure. It's going to be a massive transformation. The Greece that's going to come out of this is going to be so much stronger and better, but it's going to be a horrific process in transforming it.

No matter how long that is delayed - whether Europe continues to fund Greece, either pay the banks, provide some stimulus - without that dramatic structural change, Greece is never going to come out of this. And that's the dilemma. That's what puts Greece, I think, so far apart from the other very distressed eurozone countries. This is fundamental, and it needs reform. And I think Greek - the Greek people understand that, but just the pain and this dramatic change is too much.

CONAN: And Zachary Karabell, as long as we're talking about fundamental transformation, let us go to the EU as a whole, those problems that Sylvia was pointing out just a moment ago, that this clearly doesn't work to have a financial union without fiscal union. Are those kinds of issues going to be addressed, starting with the G-8 summit this weekend? Or are we going to have another couple of years of trying to paper over problems and injecting liquidity here and there to see if we can somehow work this out and muddle through?

KARABELL: Well, there was some consensus at the end of last year. And as you remember, there was a much more acute - or at least we'll see if it was, in fact, much more acute than what's going on now - crisis at the end of November of last year that led to an agreement or a consensus amongst the leading European nations that indeed there had to be a rejiggering, a renegotiation of this entire compact of the EU that would include much more coordinated financial policies.

And everyone has talked about the great failing, supposedly, of the EU is that it was, you know, fiscal union - monetary union without fiscal governance and no transfer payments, like the way we would in the United States be able to -basically New York tax dollars go to help unemployment benefits in...

CONAN: Alabama. Wherever. Yeah, yeah.

KARABELL: So there probably is that on the table. But the fact is the political process, as we've noted so far, is much slower, much more cumbersome, more lumbering than the financial markets, which are constantly trying to price in the worst-case scenario imaginable. And the problem with that psychology is once you start down that path of trying to price in the worst-case scenario, is you can get to zero pretty quickly.

So whether or not these things line up in real time continues to be the issue. I don't think there's any disagreement, even among the Greeks, that there needs to be some realignment of this pact so that whatever has gone on in the past three or four years doesn't happen again. There's no one who wants this to be repeated.

But whether or not that pathway can happen - I do think, just very quickly, this is an unusual experiment. And few people (unintelligible) but it bears noting that if there had been public media and financial markets on the ledge during that period of the Articles of Confederation of the United States in the 1780s, judging every moment and every misstep, it would have been kind of hard to get to the Constitution.

So these are hard things to work out for the Europeans, and I think we should at least respect the difficulty and continue to believe that there can indeed be a pathway here that doesn't realize our worst fears.

CONAN: Zachary Karabell of River Twice Research. Also with us, Heather Conley, who's now a senior fellow and director of the Europe Program at the Center for Strategic and International Studies, and our own Sylvia Poggioli, NPR's senior European correspondent. You're listening to TALK OF THE NATION from NPR News.

But not to throw more wrenches into the works, Sylvia, but if - like changing from the Articles of Confederation to the Constitution in this country, fundamental change in Europe would not be easy or swift. Any change would have to be renegotiated, then approved by every single national parliament.

SYLVIA POGGIOLI, BYLINE: Yeah, and that's going to come up now with the fiscal compact, which Angela Merkel, Chancellor Merkel, is very eager to have passed by her parliament pretty soon as it is. Already the new French president, Francois Hollande, he says no, he wants changes in that. And next month the Irish go to a referendum on the fiscal compact. And the sense is that also the Irish are getting very, very tired of austerity, and many people are already talking about a tax revolt in Ireland.

So I'm not so sure if it - if it's defeated in Ireland, the whole game may start all over again. And that's what - you know, that's when maybe they're going to have to start putting some other pro-growth, some sort of stimulus policies into this new - into the new compact.

CONAN: And as these political wheels turn ever so slowly, Heather Conley, the markets aren't waiting, and neither is money in banks in Athens and Madrid and Lisbon and now maybe Dublin.

CONLEY: That's absolutely right. And every time European countries have to go to the markets - we just saw an auction just the other day - we test this proposition. So what we're seeing now in the secondary market, Spanish 10-years are at 6.5 percent, starting to edge up to that very dangerous...

CONAN: Seven.

CONLEY: ...seven percent. Exactly. And so every time there's a moment of - you know, continued uncertainty, and we don't know if this fiscal compact is going to be renegotiated, we don't know what the stimulus looks like, and, you know, for the next 20 days, we are going to watch Greece, watch how this impacts the other countries. It starts feeling like there's a momentum of its own. No matter how much both European leaders want to stop this, how much the global economic community wants this to stop so we can get the global economy back on better footing, it just seems to feel like it's starting to - this momentum is building, and that's what's so concerning, are events going to start running out of control and then we can't stop them.

CONAN: European Central Bank cut off funds for four Greek banks today. Whether that was technical, as somebody said, or a shot across the bows, we don't know. But in any case, this is a wake-up call for everybody.

CONLEY: It is pressure. Mario Draghi already said we're going to protect our balance sheets, the balance sheets of the European Central Bank. For the next 20 days Europe is going to apply so much pressure. We'll see how the Greeks respond.

CONAN: Heather Conley, Zachary Karabell and Sylvia Poggioli, thanks to you all. We appreciate your time today. Transcript provided by NPR, Copyright National Public Radio.